Below are some excerpts from Federal Register publication of the proposed NASD rule requiring companies to provide timely reporting information as a condition for inclusion on the OTC BB. I have omitted a few sections concerning such topics as the mechanical details of the changes to the existing NASD rules, the statutory basis for the rules, comments received by NASDR during their own comment period, etc. These can be viewed by clicking on the link at the end of the post.
The excerpts are preceded by my own summary and interpretation of some aspects of what I believe was written in the Federal Register.
It should be noted that the timing for introduction of the new rules is somewhat different than that discussed in the message I'm responding to (The projections there were based largely on the prior changes in eligibility requirements for NASDAQ National Market and Small Cap listing).
This draft rule, like the earlier National Market/Small Cap eligibility rule, requests comments within three weeks of publication in the Federal Register (which was on Nov. 2, 1998) and suggests the rule could become final within 35 to 90 days after Nov. 2, 1998. In the case of the 1997 rule change, it actually took about four and a half months from publication of the draft rule to publication of the final rule in the Federal Register. My guess is that there will be substantially more comments in this case than in the 1997 instance. So unless the SEC moves more expeditiously now than then, publication of the final rule will not be until sometime in the Spring of 1999.
However, what happens after publication of the final rule will be different, at least for stocks already on the OTCBB. These stocks (as before) would have at least six months to meet the new requirements. However, unlike the earlier National Market/Small Cap eligibility changes the requirements would not be applied to all the stocks involved in one fell swoop. Instead the requirements will be phased in on a month by month staggered basis:
"Specifically, and in order to accommodate the resource demands that may be placed upon the SEC when certain issuers elect to file current public reports, the new requirements will be applied in a month-by-month staggered manner for a period from six to eighteen months from the date the rule is approved. The NASD will apply the new rule to approximately the same number of issuers for each month during that period in order to evenly distribute the SEC's anticipated work load."
The draft rule does not AFAIK specify how the monthly groups of companies will be selected. While one might hope that the most worthy (that is, the ones most likely to be scams) would be selected in the early months, this is probably wishful thinking. Though it's a pure guess on my part, I would expect some random selection process to be employed.
A few details concerning the rule itself: Once the rule takes effect, to join or remain on the OTCBB, a company will need to report via EDGAR (or other appropriate disclosure reporting system in the case of those insurance companies, banks, other financial institutions, etc. who are not required to file under the Exchange Act) on a timely basis. If a company became delinquent in their reporting, a modifier (presumably an appended letter) would be added to their stock symbol. If they remained delinquent for 30 days (or 60 days in the case of those banks, insurance companies and other financial institutions not required to make Exchange Act filings) their stock could no longer be quoted on the OTCBB until they became current in their filings.
Here are some excerpts from the document describing the draft rule:
... A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change1. Purpose
The NASD has actively studied the OTC market in an effort to address abuses in the trading and sales of thinly traded, thinly capitalized (microcap) securities. These securities are not listed on Nasdaq or any exchange and trade on the OTCBB, in the ''pink sheets'' published by the National Quotation Bureau, Inc. (''Pink Sheets''), and in other quotation media where there are no listing requirements. With respect to its examination of the OTCBB in particular, the NASD noted the lack of reliable and current financial information about the
issuers, and the perception by the public that the OTCBB is similar to a highly regulated market, such as the registered exchanges or Nasdaq.\5
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\5\ In addition, the NASD has filed a proposed rule change through its subsidiary, NASD Regulation, to require a member to review current financial statements and other business information about the issuer of a security that is not listed on Nasdaq or a national securities exchange before that member could recommend a transaction to a customer in the security and to provide certain
disclosure information on the trade confirmation for all customer transactions (solicited and unsolicited) in such securities. See SR-NASD-98-50.
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The OTCBB provides a real-time quotation medium that NASD member firms can use to enter, update, and retrieve quotation information (including unpriced indications of interest) for equity securities trade over-the-counter that are neither listed on Nasdaq nor on a primary national securities exchange. Eligible securities include national, regional, and foreign equity issues, warrants, units. Direct Participation Programs (''DPPs''),\6\ and American Depositary Receipts (''ADRs'')\7\ not listed on any other U.S. national securities market or exchange. Unlike Nasdaq or registered exchanges where individual companies apply for listing on the market--and must meet and maintain strict listing standards--there are no listing standards for the OTCBB, and there currently is no requirement that issuers of securities on the OTCBB make current, publicly-available reports with the SEC or other regulator. In fact, over half of the companies that are currently quoted on the OTCBB are not subject to any public reporting requirements.
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\6\ DPPs are securities offerings that permit investors to directly participate in the cash flow and tax consequences of the underlying investments. DPPs provide for the ''flow through'' of tax results. Thus, gains and losses are taxed to the investor not the issuer of the security.
\7\ ADRs are receipts for shares of foreign corporations that are held by U.S. banks and bought and sold in the U.S. by investors, without utilizing overseas markets.
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The proposed rule change was developed in an effort to balance the benefits that the transparency of the OTCBB provides with the public need for information about the issuers being quoted. The NASD is concerned that where there is no public information available regarding a security, the broad-based automated display of quotations in that security creates an unjustified perception of reliability. While the NASD realizes that the new rule may result in the lack of real-time quotations for those securities that become ineligible for the OTCBB,
it believe that this loss is outweighed by the benefit to investors who would, under the proposed rule, have access to information about the companies in which they may invest. In addition, transactions in securities ineligible for the OTCBB would still be subject to real-time last sale trade reporting. These reports are publicly disseminated through market data vendors on a real-time basis.
Amendment to Rule 6530
This proposed amendment to rule 6530 would limit quotations on the OTCBB to the securities of issuers that make current filings pursuant to Sections 13 \8\ and 15(d) of the Act,\9\ securities of depository institutions that are not required to make filings under the Act, but file publicly-available reports with their appropriate regulatory agencies, registered closed-end investment companies, and insurance companies that are exempt from registration under Section 12(g)(2)(G) of the Act.\10
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\8\ 15 U.S.C. 78m. \9\ 15 U.S.C. 78o-(d). \10\ 15 U.S.C. 78(g)(2)(G).
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To remain eligible for quotation on the OTCBB, as issuer must remain current in its filings with the SEC or applicable regulatory authority. A member would be required to inform the NASD of the issuer's reporting schedule. Based upon that schedule, the NASD will affix a modifier on the security's symbol if the NASD has not received information that the report was timely filed.\11\ The addition of the modifier to the symbol, as well as any changes to the symbol necessary to accommodate the modifier, will be publicly reported on the OTCBB Daily List, which is available to market makers and investors through the OTCBB web site as otcbb.com. Once an issuer is delinquent in filing a required report (e.g., Form 10-K, Form 10-Q, Form 20-F, Insurance Company Annual Statement, or call report), a security of the issuer may continue to be quoted on the OTCBB for a 30 or 60 calendar day grace period from the due date of the report,
depending on the type of issuer. After the grace period, quotations in the security of the delinquent issuer would not be permitted on the OTCBB.
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\11\ It is contemplated that the modifier will be affixed one to two days after the report is due.
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Filings for most OTCBB issuers are available through the SEC's Electronic Data Gathering, Analysis, and Retrieval (''EDGAR'') system.\12\ Foreign issuers are generally permitted to file in paper format and copies of these filings are available from the Commission. Exchange Act filings of banks and thrifts are available upon filing from the financial institution's primary bank regulatory agency. The grace period for these issuers is 30 days. In the case of banks and
thrifts that are not required to make Exchange Act filings, members can obtain call report information from the National Information Center of Banking Information website (http://www.ffiec.gov/nic) or the Federal Deposit Insurance Corporation's website (http://www.fdic.gov). Call reports are filed 30 days after the end of each calendar quarter and are available to the public within 15 days of filing. Insurance companies file annual statements with the National Association of Insurance Commissioners (''NAIC'') by March 1 of each year. This
information is released to the public by NAIC by April 1. Because of the delay in the availability of call reports and insurance company annual statements, the proposed rule permits a 60 calendar day grace period for the quotation of securities of these companies after the deadline for the issuer to submit a report to the appropriate regulator.
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\12\ EDGAR is the SEC system for the receipt, acceptance, and
review of documents submitted in electronic format.
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Amendment to Rule 6540
This proposed amendment to Rule 6540 would prohibit member firms from quoting an issuer's security if the issuer has not made current reports with the SEC or the appropriate regulatory authority. Members must also provide such reports to the NASD, although the reports may be provided by any market maker in the security. The NASD is exploring ways to reduce the burden of this requirement for members, particularly with respect to issuers who are EDGAR filers. As discussed above, the NASD will affix a modifier to the security's symbol if the NASD has not
received information that the report was timely filed. This indication will provide members with notice that the NASD has not received information that the issuer's report was timely filed. Once the NASD provides this notice, the member will have the opportunity to acquire the necessary report and provide it to the NASD before the end of the grace period.
Phase-In
The new requirements will be immediately effective upon approval of the rule for securities not previously quoted on the OTCBB. Securities quoted on the OTCBB on the date the rule becomes effective will be afforded at least six months to comply with the new requirements. Specifically, and in order to accommodate the resource demands that may be placed upon the SEC when certain issuers elect to file current public reports, the new requirements will be applied in a month-by-
month staggered manner for a period from six to eighteen months from the date the rule is approved. The NASD will apply the new rule to approximately the same number of issuers for each month during that period in order to evenly distribute the SEC's anticipated work load. The delayed effectiveness of the rule should also enable market makers, investors, and issuers to take appropriate action. It should be noted that for issuers who file a Form 10 or Form 10SB with the SEC to register under Section 12(g) of the Exchange Act,\13\ all SEC comments, if any, must be cleared with the SEC before securities can be quoted on the OTCBB.
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\13\ 15 U.S.C. 78l(G).
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...
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 35 days of the publication of this notice in Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:
(A) by order approve the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying at the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the NASD.
All submissions should refer to File SR-NASD-98-51 and should be submitted by November 25, 1998.
frwebgate.access.gpo.gov
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